Tired of overpaying taxes? So are hundreds of other business owners. Statistics show that around 93% of small businesses overpay in taxes year after year.
Why? It’s not that their businesses are complicated. Most of the time, it’s just that they’re not organized.
A clear income tax checklist fixes that.
In this guide, we’ll cover the documents you need, deductions most ecommerce sellers miss, and the steps to take so you can file without errors. Whether you’re doing your taxes yourself or handing them off to a CPA, this is a great starting point.
TL;DR – Income Tax Checklist
Skipping right to the checklist? Here are five items to check:
Personal information: Gather pertinent documents, such as your Social Security Number, prior return, and bank details.
Income documents: Collect all income documents, such as W-2s, 1099s, and P&L Statement.
Business deductions: Document items you can deduct from your taxable income, like fees, inventory, advertising, and home office expenses.
Tax credits: Check for retirement contributions, education credits, Child and Dependent Care Credit, and the like.
Filing: Make sure to file the right status, decide on your deduction method, and choose a filing method that works for you.
We’ll delve deeper into these in the article, so keep reading to learn more.
Who Must File a Federal Tax Return?
Before anything else, confirm whether you’re actually required to file.
If you own an ecommerce business and are pulling in income from sales, dropshipping, or freelance work, you most likely are.
According to IRS guidelines, you’re required to file if you’re a:
- Single filer under 65: Should have a gross income of at least $14,600 annually.
- Married filing jointly, both under 65: Earning $29,200 annually or higher.
- Self-employed: With net earnings of $400 or higher.
If you received a 1099-K, a tax report issued by third-party payment processors, it also means the IRS already knows the payments you received from your payment processor or marketplace.
So, bottom line: if you’re an ecommerce seller, best assume you’re required to file an income tax return.
Income Tax Filing Preparation Tips
Income tax filing can easily go sideways if you are unprepared.
Do these before touching the tax form:
- Update your books: If your books are months behind, fix that before anything else. You can’t file accurately from a mess.
- List all your income sources: If money came in, it counts. Amazon, Shopify, Etsy, client invoices, freelance gigs. All of it.
- Pull up your prior return: This shows income sources you previously reported and deductions you claimed.
- Set an internal deadline that gives you a buffer: The federal deadline is April 15. Build a realistic buffer to avoid rushing. That can be 10 days prior to the deadline or more, depending on your business complexity. Cramming to make it to tax day leads to errors.
- Consider when you need an extension: Don’t think you’ll file on time? You can apply for an extension. This gives you until October 15 to file. Note that this just gives you more time to file. You still need to pay by April 15.
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Income Tax Checklist to File With Fewer Errors
Now, let’s go over the full income tax checklist.
Go section by section, check off as you go, and don’t hand anything to your CPA until you’ve completed this.
Personal Information
These are the basics. But getting small errors here can delay the whole process.
- Your and your dependents’ Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- Prior tax return for reference
- Bank account
- Routing number for direct deposits of any refunds
Income Documents
Every income stream needs to be accounted for. Remember that the IRS has most of this information already, and your return needs to match.
- W-2 forms from employers (if any)
- 1099-NEC for freelance or contractual work
- 1099-K from payment processors (like PayPal or Stripe) and marketplaces (such as Amazon or Shopify)
- 1099-INT for interest income
- 1099-DIV for dividends
- Schedule K-1 if you’re in a partnership, S Corp, or trust
- Profit and Loss Statement (your bookkeeper should be able to give you this by the 15th of each month.)
- Any other records of other income, such as payments received from rental properties
Business Deductions
If you are an ecommerce seller, this is where you’ll get your biggest tax savings.
Document every business expense before filing. These can legitimately reduce your taxable income:
- Cost of Goods Sold (COGS)
- Platform fees (e.g., Amazon seller fees)
- Shipping and fulfillment costs
- Ad spend
- Software subscriptions (e.g., bookkeeping tools and email platforms)
- Home office costs (if you use part of your home exclusively for business)
- Business portion of phone and Internet expenses
- Professional services (e.g., accounting and legal fees)
- Education and training expenses related to your business
- Business travel expenses
- Health insurance premiums if self-employed
- Retirement contributions made to SEP-IRA or Solo 401(k)
Applicable Tax Credits
Unlike deductions, tax credits reduce your tax bill dollar-for-dollar. That means it slashes the amount you owe directly. Not your taxable income, but your actual tax bill.
These include:
- Child Tax Credit: A credit you can claim for having a child.
- Child and Dependent Care Credit: Credit for paying someone to care for your child while you work.
- Earned Income Tax Credit: Applies to low-to-moderate earners and depends on your income level and number of dependents.
- American Opportunity Credit: If you’re also a student, this covers tuition and education expenses for the first four years of college.
- Lifetime Learning Credit: If you pay for a business course or any other program to improve your business skills, you can get up to $2,000 toward tuition of any level of education, without a four-year limit.
Filing Checklist
You’re almost there.
But before you submit, run through these steps to make sure you haven’t missed anything:
- Choose the correct filing status: This determines your tax rate and standard deduction amount. Choose the one that applies to you (single, married filing jointly, head of household, etc.).
- Decide on your deduction type: either standard deductions or itemized deductions. The standard deduction is a fixed rate based on your filing status. Itemizing, on the other hand, means listing individual deductions. It’s best to get ecommerce-specific tax services if you’re unsure which one will give you higher deductions.
- Select your filing method: You can either file your return yourself or hire a CPA who understands your business. Working with a CPA specializing in ecommerce will give you a serious advantage, as they can plan your taxes year-round and understand the nuances of an ecommerce business model.
- Review for inaccuracies and gaps: Ensure details such as your SSN are correct. Documents should be signed, and the math must add up. The IRS rejects thousands of returns due to these seemingly small mistakes.
- Keep a complete copy: Once filed, keep a complete copy of your return, including all attachments. You’ll need it for reference next year.
Common Tax Return Mistakes to Avoid
The checklist above will ensure your returns are accurate.
But just to be extra careful, watch out for these common mistakes ecommerce sellers make when filing their return:
- Misreporting 1099-K income: Your 1099-K from your merchant platform (like Amazon) is not your gross profit. It shows your gross sales. Sellers often forget to subtract COGS, fees, refunds, and other expenses, causing them to overpay significantly.
- Missing the self-employment tax deduction: Self-employed taxpayers pay 15.3% in SE tax. But the IRS allows you to deduct half of that from your gross income before calculating what you owe. So let’s say you paid $5,000 in SE tax, you can subtract $2,500 from your income, lowering your tax bill.
- Forgetting quarterly estimated taxes: Missing estimated quarterly payments triggers a penalty, even if you pay on the tax deadline (April 15). IRS Form 1040-ES comes with a worksheet that will help you estimate your expected income. But most business owners use the simpler safe harbor rule of paying 100% of last year’s return.
- Using seller dashboards as a substitute for real bookkeeping: Your Amazon or Shopify dashboards will show you your sales transactions, but they are not a substitute for an actual P&L. If you don’t want to incur the cost of hiring a full-time bookkeeper, outsourcing your bookkeeping to a reliable service provider or virtual bookkeeper is a smart move.
Tips to Keep Records After You File the Return
The IRS can audit returns for up to three years after the filing date. And even if you don’t trigger an audit, keeping at least three years’ worth of files will help you spot patterns and build a better tax strategy off historical data.
Here are other tips to remember after you’ve filed:
- Three years is great, but keep data for longer if possible: If you have any complex business transactions, it’s better to keep records for seven years or longer. The IRS has up to six years to audit your return if they suspect under-reported income, and up to seven years where claims for losses from worthless securities or bad debt deductions are made.
- Store digital copies: Keep files in a cloud backup, not just on your hard drive. If anything gets destroyed or missing, you’ll have peace of mind knowing you have back-up copies stored.
- Keep records of asset purchases: Store records of purchases for as long as you own the asset, plus three years after you sell. Remember that the IRS has three years from the date of your return to audit.
Frequently Asked Questions (FAQs)
Have any more questions on income taxes? You might find answers here:
What Documents Do I Need to File My US Income Taxes?
Here are the basics:
- Proof of all income (W-2s, 1099s, and P&L Statement)
- Social Security Number (SSN)
- Documentations for deductions you’re claiming
You need clean books for these. If your numbers are outdated or inaccurate, the first step is sorting your books.
Should I Take the Standard Deduction or Itemize?
It depends on which gives you the higher deductions.
The current standard deduction amounts are $15,750 for single filers, $31,500 for married filing jointly, and $23,625 for head of household.
Itemize the deductions if your deductions exceed these numbers. Still unsure? Consult an ecommerce CPA.
What Tax Credits Can Lower My Tax Bill?
Examples of tax credits that can lower your tax bill are:
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit
How Do I Report Side Hustle Income?
Income earned from a freelance gig or side hustle goes on Schedule C.
Report gross income, then subtract legitimate business expenses to arrive at net profit, which is what you’ll be taxed on.
What Should I Do if I Miss a Tax Form?
Employers (if you’re a part-time seller and have another employment) and payment processors are required to send tax forms by January 31. If you don’t get your forms by February 2, contact them directly.
If you still haven’t received your forms by the end of February, you can call the IRS for help on missing W-2s or 1099s.
Conclusion
April comes around fast.
If tax season is chaos year after year, follow this checklist to start getting through it cleanly, proactively, and in a more organized way.
And don’t forget the essentials: Clean monthly books, a CPA who’s experienced in and understands your business, and a tax strategy that runs all year.
Start planning your taxes now with EcomBalance Tax.
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Get a custom quote for EcomBalance Tax services. Let’s get straight to work.
